Data Delivers: Non-Bank Small Business Lenders Make an Impact
The online, non-bank finance platforms serving small businesses in the U.S., UK, and elsewhere are still relatively young, with most platforms launching within the last few years. While most platforms disclose the number of loans they originate and businesses they serve, the industry, because of its youth, had lacked data sets large enough to highlight the economic impact of those originations.
However, as Bob Dylan said, “The times they are a-changin.’ ” As the industry matures, an increasing number of alternative finance platforms are able to quantify the impact their platforms made in prior years and demonstrate their importance to the small business financing space.
Take, for instance, recent analyses conducted by OnDeck Capital, Funding Circle, and PayPal. They offer slightly different approaches in explaining the impact of their platforms beyond loan origination and businesses served.
OnDeck and Funding Circle’s studies focus on the direct, indirect, and induced impacts on economic growth and job creation resulting from each platform’s originations. In November 2015, OnDeck released an updated impact analysis of its loan originations largely using the same metrics as its first analysis in 2014. The earlier study found that for the $975 million in lending (at that time), OnDeck loans generated $3.3 billion in economic output and roughly 22,000 U.S. jobs. Alternatively, for every $1 in OnDeck lending, roughly $3.42 in economic output was generated.
Under the 2015 economic impact study, for the $3 billion in financing OnDeck provided since inception (now $5 billion), OnDeck loans generated $11 billion in additional economic output and 74,000 jobs were created. Alternatively, $1 of lending from OnDeck generates $3.62 in economic output. As the chart below indicates, loans in the 2014 OnDeck survey were predominantly used for buying inventory, employee hiring and retention, and acquiring business equipment.
Survey Respondents’ Uses of OnDeck Loans
Note: Approximately 4 percent of survey respondent loan amounts are associated with responses of "Don't Know/Not Sure" and "Other." Those categories are not included in this chart.
(It is worth noting that while OnDeck’s economic impact study focused on overall macroeconomic impact, the company has provided interesting performance data around return customers in its quarterly filing with the SEC. More specifically, for the platform’s 2013 and 2014 customer cohorts, those who took at least three term loans grew their revenue and bank balances, on average, by 28 percent and 49 percent, and 29 percent and 54 percent, respectively, from their initial loan to their third term loan.)
Across the pond in the United Kingdom, Funding Circle recently released its own economic impact report covering gross value add (GVA) contribution (direct, indirect, induced metrics) to economic growth and job creation since 2010. According to the report, Funding Circle’s loans have provided a £2.7 billion ($3.6 billion) GVA contribution since 2010, £1.2 billion of which is direct, £752 million is indirect, and £709 million is induced.
The study goes on to assess the revenue and profits borrowers took in after obtaining funding through Funding Circle. More than 60 percent of Funding Circle borrowers saw revenue increase and nearly half saw a rise in profits, and Funding Circle loans supported the creation of up to 40,000 jobs. Total impact can be viewed across the sectors listed in the chart below. GVA has grown considerably since 2010, with Funding Circle projecting a GVA boost from the platform’s loans equal to £2.1 billion per year by 2025.
Total GVA boost resulting from Funding Circle loans, by sector*
Sources: Funding Circle Loanbook, Office for National Statistics, Cebr analysis.
Note: Only the top 10 sectors are shown
PayPal took a slightly different approach in analyzing the impact of its platform on small business financing. Numerous reports have documented the decline in small business bank lending, especially to startups; the decline in community banking across the U.S.; and the challenging lending environment faced by minority-owned small businesses—a problem the Milken Institute and the U.S. Small Business Administration are determined to fix through the Partnership for Lending to Underserved Markets Initiative (press release). Few reports, however, provide data covering the influence of alternative financing products in areas hardest hit by the 2008 financial crisis.
Based on data pulled from 60,000 PayPal Working Capital (PPWC) loans disbursed to more than 18,000 U.S. small and medium-sized enterprises (SMEs) between October 2014 and March 2015, PayPal found that roughly one-quarter of its loans were disbursed to the 3 percent of counties that have lost more than 10 banks since the financial crisis. Indeed, more than a third (35 percent) of PPWC loans went to low- and moderate-income businesses, and more than half of PPWC loans (61 percent) went to entrepreneurs and firms less than 5 years old. And firms that witnessed the closure of 10 or more bank branches in their areas since the financial crisis and have received PPWC loans, have seen their sales soar more than 22 percent after receiving the loan. According to the report: “If the jump in sales spurred by an online business loan were extended to every underserved SME in the U.S., the nation’s economic activity could increase by as much as $697.95 billion, or 3.98 percent of 2015 GDP.”
Online Borrowing and Bank Departures
Sources: PayPal data, Federal Deposit Insurance Corp.
In the future, expect to see more studies that reflect the methods used in the OnDeck, Funding Circle, and PayPal analyses. The industry is beginning to offer detailed insight beyond totaling loan originations and small businesses served. Now firms are assessing the economic impact of their products while highlighting their importance to small businesses that suffered in the financial crisis. That will inform the debate surrounding the importance of alternative, non-bank financial platforms and underscore the potential of these platforms to fulfill the capital demands of small businesses.